ICON PLC (ICLR) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 ICON plc earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating the question-and-answer session towards the end of the conference. If at any time during the call, you require audio assistance, (OPERATOR INSTRUCTIONS).

I would now like to turn our presentation over to our host for today's call, Mr. Ciaran Murray, Chief Financial Officer. Please proceed, sir.

Good day, ladies and gentlemen. Thank you for joining us on this call, covering the quarter ended June 30, 2007. Also on the call today we have Dr. John Climax, our Chairman; and our Chief Executive Officer, Mr. Peter Gray. Before I hand this call over to John, I would like to note that this call is webcast. There are slides available and the comments will follow the slideshow.

I will now make the customary statement in relation to forward-looking statements. Certain statements in today's call may constitute forward-looking statements concerning the Company's operations, performance, financial conditions and prospects. Because such statements involve known and unknown risks and uncertainties actual results may differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties, investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Today's commentary refers to our quarter two, ending June 30, 2007. Please note in the following commentary the financials for both current and prior quarters and any reference to margin is after charging stock compensation expense and the effect on diluted shares of the adoption of SFAS 123R.

And with all of that said, I would like hand the call over to John.

Thank you, Ciaran. Good day, ladies and gentlemen. We are delighted with the second quarter's performance. Net revenue grew 37% over the comparable quarter last year to $147 million of which 52% was earned in the US and 48% in Europe and the rest of the world. The organic growth rate was 34%. Year-to-date net revenue was also up 37% to $283 million. Operating income for the quarter after taking the SFAS stock compensation charge of $1.4 million was $16.1 million, representing a 42% increase over operating income of $11.3 million for the same quarter last year.

Year-to-date operating income was $30.8 million representing an increase of 44% over the prior year. The stock compensation charge included [invoice] $2.6 million. Group operating margin for the quarter was 10.9%, up from 10.6% for the same quarter last year. Year-to-date, the group operating margin was also 10.9%. Core margin in our clinical business [for 42] remained at 11.3%, unchanged from Q1. Our central laboratory business recorded an operating margin of 6.6% in Q2 on revenues of $12.9 million compared to a margin of $3.5 million on revenues of $11.5 million for the same quarter last year. Year-to-date, our Central laboratory recorded an operating margin of 6.3% on revenue of $25.9 million compared to an operating loss of $0.2 million on $20.8 million on revenues for the first half of 2006.

Net income rose to $13.3 million from $9.3 million last year representing 43% growth. EPS grew from $0.32 per share in Q2 '06 to $0.45 per share, a 41% increase. The effective tax rate for the quarter was 22% compared with 24% for the same period last year.

Year-to-date, net income increased to $25.6 million from $16.8 million last year representing 52% growth. EPS grew from $0.59 per share last year to $0.86, a 46% increase. The effective tax rate for the year was 22% compared with 26% last year. Cash flow provided by operating activities was $22.2 million in the quarter. We spent $17.9 million on capital expenditure, of which $10 million related to the expansion of our Dublin facility.

To date we have invested $33 million in this development and anticipate that we will spend another $33 million to complete the project by the end of 2008. I am pleased to say the first two blocks of the building are complete and we moved in last week.

Year-to-date, cash flow from operations was $19.3 million and capital expenditure was [$30.4] million. In relation to the possible sale and leaseback of our Dublin facility, we have completed the tender process and received a number of offers in excess of $100 million. However, due to changes occurring in relation to the density of development in our area, we believe that there could be considerable future upside to the value of the site. Accordingly, we have decided not to sell the property at this time as it may appreciate further when the local planning policy is clearer.

At June 30, 2007, net cash and short-term investments less debt amounted to $91.1 million compared to $84.4 million at the end of Q1 and $97.9 million at the end of December 2006.

DSO's at the end of June were 53 days compared to 59 days at the end of Q1 and 53 days at the end of December 2006.

Growth business awards for the quarter were a record $264 million. Cancellations were $34 million or 13% of gross awards. Accordingly, net business wins were a record $230 million compared with $166 million in the same quarter last year. This represents an increase in net award of 39%, a very strong book to bill of 1.6.

As a result, our total backlog at the end of June was $1.05 billion, a 36% increase over last year. This is the first time our backlog has exceeded the $1 billion milestone. Of this backlog, we expect $493 million to be earned in the next four quarters, a coverage of approximately 77%.

We are delighted with ICON's performance to date in 2007. Revenues as well as operating and net income grew strongly, and business wins continued to be buoyant. With our backlog now exceeding $1 billion, we have strong confidence in the outlook for the remainder of the year.

Before moving to your questions, I would like to thank our global workforce, which now exceeds 5,000 people in 33 countries, for their tremendous contribution to our continuing success.

May we now have the first question, please?

(OPERATOR INSTRUCTIONS) John Kreger.

Could you please give us an update on your Phase I business, how that's progressing? And also the lab, I was curious, it looked like sequentially the revenue was down a bit but you were able to drive better operating income. Anything going on behind that?

Hey John, Peter here. On Phase I, the business made a small loss in the quarter as we had I think been indicating from early in the quarter. I think on our last call we said that we expected that. Its backlog continued to grew strongly, so we are pretty confident that we're going to see significant improvement in its performance as we go through the rest of the year. But the short answer to your question is in Q2, it incurred a small loss.

In relation to the lab, yes, you're right. The lab had a very small decrease in revenues. It just dipped under 13 million at 12.9 million. We had originally projected that its margin would actually dip this quarter, so they did a very good job, given that their revenues were not growing, to come in with the margin performance they did. Their bookings -- this is more information than you asked for, but I think it probably deserves the color -- their bookings were 15.5 million net in the quarter. Again, they had a quarter where they had unusually large levels of cancellations. Our gross bookings were over 21 million in the quarter. They're not anticipating that that cancellation experience will continue through the rest of the year. So they are expecting to see stronger booking numbers as they go through the second half of the year. There are encouraging signs that their kit volumes are lifting as well, so we are expecting that we'll begin to see the revenues rising in the quarters ahead.

Great, thanks. And just to clarify that last point, Peter, when he said kit volumes, do you mean inflow or outgoing kit volumes?

Outgoing kit volumes are continuing to rise. There are signs of incoming kit volumes also beginning to rise and that's why they are forecasting that the revenues will be improved in the current quarter, John.

Great, thanks. And just one last question. Can you give us an update on the general clinical environment? You had great bookings. Would you attribute that more towards strong proposal flow or improvement in your hit rate? And are you seeing anything else interesting in terms of the distribution of your wins?

You've got a lot of questions there. The market conditions continue to be very robust. We have seen a small increase in value of opportunities compared to last year but last year was just extraordinarily strong. So what's that really saying to us is the market continues to be very robust. Our win rate -- our wins are up. And compared to last year, our win rate has edged upwards in the last 12 months on a quarter by quarter basis. So we're very pleased with the performance of our business development group in that regard. And your -- the third part of your question, John, remind me again?

Proposal flows and any interesting changes in the distribution of those wins. What sort of clients are they coming or is that pretty stable?

It's pretty stable. Overall, for the year about 45 to 48% of our wins are coming from large Pharma; 34% coming from biotech, and 19% coming from the midsize companies. And that's pretty much in line with what we have seen in prior periods. A few percentage points movement one way or the other.

Steve Unger.

Could you talk about the acquisition and your strategic rationale and what you plan to do with it and financial implications?

Pretty broad question there, Steve. You know, the rationale is the same rationale as we had when we acquired the staffing business in the US a few years ago. We get a lot of requests from our clients to provide them with fill-in staff, a CRA here or a project manager there, to supplement their own internal teams that are executing on projects that are being run internally. And that's not our business. Our core business is the full-service management of clinical trials. And therefore we haven't been able to respond to those kinds of requests as much as we'd like to because we want to service our clients.

So we acquired a business in the US a few years ago called Managed Clinical Solutions, which we've renamed ICON Contracting Solutions. And that business is doing well in the US. We've been looking to expand that business beyond the shores of the US for the last couple of years. And the DOCS opportunity fit very well with our strategic desire to be able to provide that service and service that segment of the outsourcing market, in Europe in particular.

So the broad rationale is it's a market segment within outsourcing that we get asked to service and we're putting ourselves in a better position to service it. When we look at the growth characteristics in that market from the business we currently have and when we look at the growth characteristics of DOCS, our recent acquisition, that market opportunity appears to be growing in excess of 20% per year. So, again, very strong growth characteristics there.

And both businesses have the additional benefit to us that in periods particularly of strong growth within our clinical business, having access to their database of contract staff can be very helpful to us as we just try to staff up quickly on projects that are awarded to us. Particularly at times when our book to bill is as strong as it has been over the last 12 months.

So those are the broad strategic reasons behind it. In terms of the numbers from that business, it's expected to have revenues of somewhere in excess of $30 million in 2007 in total. We are expecting in the second half of 2007 that because of the growth you're probably talking 16 or $17 million of revenues in the second half of 2007, which will be our period of ownership.

Margins this year in the second half of the year are expected to be relatively modest, probably between 6 and 7%. That's because the business made significant investments last year in growth and they're only beginning to reap the benefits of those currently. But we are expecting that the margin performance of that business will strengthen considerably through 2008. And we're anticipating and part of the rationale of the acquisition is that we will do margins in excess of 10% in 2008 with revenues, topline growing in excess of 20%.

Okay so way in the margin in the back half of this year a little bit and then hopefully be additive to the margin in '08?

It will certainly be coming back -- coming up to comparable margins in the organization. We're hoping that the rest of the organization's margins will be (technical difficulty) so they won't quite catch up [on us] in 2008, I hope, Steve.

We hope so too. In terms of the Central lab itself, are we still investing in the current quarter or are we now absorbing that in those investments? I mean, we made those investments and will they last for several quarters now? Are we --?

I think the investments you're referring to is our setting up a capability in Singapore and yes, that's done. It's pretty modest as we always intended it would be. It's a pretty modest operation at this stage; only a few people and handling certain samples only. The investment that we plan to make is now made, yes. And that should be stable. We're not expecting any significant new investments in the next two quarters and no specific plans for 2008.

Okay. And then one last question if I might. The gross new orders have really ticked up over the last, let's say, three or four quarters. Is this coming from new relationships that you have been cultivating over the last, let's say, two, three years? Or primarily maybe new business flow from companies that you've been working with for several years?

I think as you've seen -- and again, it's been part of an ongoing trend with ICON -- our customer base is diversifying all of the time. And John, you have some data here in relation to what's happened on the top five, top 10 and so on. Do you want to give that here?

Yes, in terms of the largest clients, they're still under 10%. So, no worries there. But in terms of top five, we are at about 32% compared to 37% last year. And the top 25, Steve, is 69% now where a year ago was 73. So what all that's saying is we are adding new clients. We are diversifying our sales among a wider range of clients. And so I would attribute the strong growth to be more expanding of client relationships than necessarily big growth in one or two clients.

Excellent. Keep up the good work. Thank you.

Dave Windley.

Thanks for taking the questions and congratulations on the quarter. I wanted to ask a question on your corporate development front. It sounds like your European Phase I business has improved somewhat. I know you've been looking for a broader geographical presence in Phase I. And I wondered how much longer do we need to wait for that announcement?

Well, fortunately Dave, the rest of the business is going really well so it's not really making us feel under pressure that we have to do it. I have at this stage no credibility on this answer at all because I've been saying every quarter for the last, I think, five or six quarters that we think we're really close to doing a Phase I transaction. And here we are again and I'm saying it again.

In fact, I'm backing away from that. So it's been -- there's a transaction or a business that we have been pretty close to now for the last year that we were hoping we would have across the line and part of ICON by now that has hit a few road bumps. And it's not now likely that that company would be part of ICON in the next -- in this quarter certainly. We're still talking with them and hopefully we can resolve the bumps in the road that we've encountered.

So we continued to be keen to acquire Phase I assets. We don't feel under pressure that it's something we have to do. Certainly not something we have to do at any price. And as I think everyone is aware, pricing in this marketplace is pretty high and we have been noted in the past for being somewhat parsimonious in relation to the prices we pay for assets. So, all those things are weighing upon us.

There are other Phase I opportunities that we're also looking at currently. We still have in the back of our minds a backup plan of starting a Greenfield Phase I unit. But our business is not under pressure to own Phase I assets in the United States today and therefore, we're not rushing to do anything. Hopefully, sometime in the next 12 months we might get something done. But I've been wrong consistently now for 18 months and I'd be a foolish man to predict that I won't be wrong again.

Okay, thank you. And as you think more broadly about M&A in general, is Phase I top of your list still? Even as you back away from certainty on timing, is that top of your list? You acquired this staffing business. Is there anything else in the lab area that is moving up in ranking in terms of your interest level?

The answer, David, is we have -- and in our investor presentations consistently for the last number of years -- we've had a list of areas that are of interest to us, which would include lab, would include therapeutic niche CRO's. It would include staff, it would include a whole range of things. And in any given quarter, we're probably looking at five to 10 opportunities, most of which are offered to us and therefore we look at them and dismiss them because they're not something we went out and looked for myself ourselves. But there's probably two or three ongoing at any point in time where we're actively interested in, maybe we've initiated the discussion and so on, in a wide variety of areas.

So, I don't want to give any impression that there's a particular hot area besides Phase I. We've certainly been very consistent and very structured in how we've looked at Phase I and how we searched for potential acquisitions in Phase I. We are doing that in some other areas as well. But given my track record on this, I'd prefer maybe not to specify any one area. Because if you'd asked me this question nine months ago and said are you likely to do a staffing acquisition in the next nine months? I probably would have said no, that's probably not our highest priority. But a good opportunity came our way. We evaluated very closely and we proceeded with that.

So, I've given you a very long, vague answer there, David. The short answer is we have a number of areas that we're interested in; the same areas we've been saying for many areas that we're interested in. And unfortunately, acquisitions are opportunistic and the things that you'd like to buy aren't always for sale. And the things that you don't really -- that you're not really interested in often are for sale and we spend a lot of time filtering our way through those.

Understood, not trying to pin you down too hard there, Appreciate the answer. On -- moving over to the DOCS transaction, thinking about labor more broadly, the DOCS will help you to supplement your own labor and staffing needs. How is the labor market from an access to experience talent standpoint? And give me a perspective on how much of your incremental need will DOCS in the overall staffing -- kind of now your global staffing presence augment or support or whatever the right descriptor might be. I'm just trying to get a sense for how you're adding staff and how hard it is to do that.

Let me start at the back end of that question and I suppose emphasize. DOCS is not acquired to solve our problem. And the strategic rationale for DOCS is about the market, a separate market segment that it's addressing that continues to grow as far as we can see in excess of 20%. And our rationale for being in the business, our primary rationale for being in the business is because of that. Not because we're looking for some businesses that will help us to fill our teams.

Incremental impact of DOCS on our staffing within ICON is relatively modest. If it helps -- if it adds our supplements to the extent of 5% our needs, that would be -- I think that would be the extent of it on an ongoing basis. So 95% of our staffing needs will continue to be filled in the way we've always done it, which is by going out into the marketplace and hiring people.

Your basic question is what's the state of the labor market. And I guess the answer to that is it continues to be tight, as it has been for the last 10 years. You know, I sound like broken record on this one but we have grown from a company of a few hundred people 10 years ago to, as John said in his opening remarks, now over 5,000 people following the acquisition of DOCS.

The market is growing very strongly. There's clearly demand for experienced people out there that we're all competing for. But we're managing to grow. We've added another 330 people in the course of the quarter that we're reporting on here. It's always with difficulty. We're always fighting hard to get these people but we're managing to do it and we don't see any change in that.

And is this the primary -- we've talked about this in the past, but revenue is growing very rapidly. And as a result of that very rapid growth, your margins are not ascending to your longer-term targets as quickly as one might have guessed two or three quarters ago. And is labor the primary reason for that?

I think the cost of hiring and training labor is the primary -- is a contributor. I'm not going to say it's the primary reason but it's a contributor. Obviously our Phase I business losing money doesn't help as well. And in my earlier answer to John Kreger, I signaled that the Phase I business lost money. So that's one of the anchors on progression in our margins.

But when you're growing at 37% and adding the number of people that we've been consistently adding now for quite some time, there is a significant cost in terms of recruiter costs and in terms of training new people as they come in more than our infrastructure is typically sized to deal with. And so there's a disproportionate incremental cost associated with that level of growth. And maybe I should explain that a little bit more clearly.

We have our own internal recruitment groups within ICON who are using the Internet and networks and so on to find people that we can get to join the Company. And by so having such a group, we avoid or minimize our expenditure on recruiter fees, for example. In periods of very strong growth, our own internal teams aren't able to cope with the volume. And therefore, we have a greater reliance on external recruiters to whom we have to pay pretty significant fees, as we all know. And that's a major influence on our cost as we're growing pretty quickly.

Okay. That helps, thank you very much. Congratulations.

Douglas Tsao.

Thanks for taking the question. Peter, I was wondering if you could provide some commentary on the trends in the Central lab regarding the geographic distribution of revenues. And I ask this question in the context that I know in this last quarter you made some investments in expanding capacity for the lab in Singapore.

I suppose the complex answer to that question -- or maybe I always make it complex -- the lab has -- our Central lab has two primary locations; one in the United States and one in Europe. The whole concept of Central lab is not having multiple, multiple locations but having as few locations as possible handling the samples and analyzing them in a consistent fashion.

What we have seen in our clinical business is -- and I've talked about this many times -- about the increasing globalization of clinical research and the greater desire on behalf of our clients to go to geographies that they haven't traditionally gone to in search of patients for their files. That in turn leads to more patients being in places like Asia. And there are samples therefore coming more samples arising in Asia on trials that the lab were involved in today than there would have been five years ago; significantly more. Singapore is a staging post for those samples. There's a handling and processing activity going on in Singapore in terms of getting the samples in and having basic sampling down -- basic testing done locally. And where more complex tests happen to be done, the grouping of those and the shipping of them to one of the other lab locations. It's not particularly high-tech what the lab in Singapore is doing, but it is responding to the fact that there are a lot more samples in that geography today needing handling. And it made logistical sense to have a central hub in Asia to handle that.

Could you provide a little more color on some of the investments that you recently made to the Singapore lab?

They're very modest. We added some additional space in our clinical research facility in Singapore specifically to handle samples. We hired, I think, five people there. We have some basic equipment there. And it is, as I said, a staging post. So the costs that we were talking about was the cost of the people, the cost of the additional space and the cost of the infrastructure supporting them as they do their handling.

Okay, great. And then could you provide an update of the margin in the US clinical business during the quarter?

We don't break down our margins by geography. And in fact, in a globalized clinical research business it's probably misleading any way to think in terms of margins in a particular geography. So I think I did make reference. And probably where your question is coming is I did make reference in the past to the fact that within the US, the margins in our clinical business last year were not as strong as they had been in previous years. So to that part of your question, I can say they have made significant progress this year in getting -- in moving them back up again, but not all the way back to where they were three or four years ago. But they're making good progress and should be there by the end of this year or sort of mid next year.

Okay. And then could you talk a little bit about the imaging business? I know --

If I can add something -- sorry, Doug, do that before you go into your second question. I think I met with you during the course of the quarter and you had I think an impression that the margins in our US business, or clinical business, had at some stage dropped below 10%. And I'll take the opportunity on this call to say that was never the case. The margins in the US business have always been very good. And my comments last year -- probably you'll consider it with hindsight -- were saying that having been really, really good three or four years ago, they were not quite as good last year. And now they're getting back up there again. Just so I can add that color to it.

Fair enough, fair enough. And then I was just wondering if you could provide a little color on the imaging business, which I know you rebranded to ICON Imaging. And potentially any effects that -- is -- has that sort of had an impact on other pieces of the business? And are you seeing synergies between the imaging lab and say, the Central lab or the clinical business?

I'll ask John Climax to respond that.

Yes, the imaging lab is making good progress. Cross-selling in the imaging lab is a very important feature, particularly in the area of oncology. And we have an initiative called Oncology Solutions and that's what they do. We're trying to bring that into cardiovascular and other areas where we are doing some imaging in. But having said that, it is not often possible to have cross-sell because your clients already decide which providers they're going to use. It's just like a Central lab.

But overall, as we are doing global work, as clients are narrowing their suppliers to single -- or not single but a smaller amounts of vendors -- companies like us that provides a broad spectrum including imaging will obviously benefit.

Are you making progress in getting on preferred provider lists specifically in the imaging field?

Yes, we are on some of the preferred provider lists and the clinical business is on a number of preferred provider lists. So we are able to open the door for imaging business to be part of that service too. So those initiatives are ongoing.

Great. And then the final question I have is, Peter, if you could provide a little color regarding the timeframe that it takes to hire a new employee and then have them fully trained and then deployed in the field? In the clinical business.

That's a real how long is a piece of string question, Doug, because it really does depend upon where you're recruiting and it depends on the expertise or background of the employee. So there's multiple layers to that answer.

Within the US, if it's an experienced person that we're hiring, we can do a hire within a month from the time that we decide we need to hire to the time that we actually have the person joining us can be as little as four weeks and maybe six weeks at the outside. And if they have experience they will go through some -- a couple of weeks of classroom training and then they'll go in the field. They'll be monitored or mentored in the field for a number of months after that. But given that they're experienced, there will be an assumption that they would be up to speed pretty quickly.

Inexperienced people, on the other hand, may go through three months of training before they're out in the field at a minimum. And then when they're in the field, they're mentored for quite some considerable time. Completely inexperienced people would be mentored for over a year until they pass certain competencies in the field. They're still out in the field,, they're doing productive work but they're very closely mentored in that period. And that's just the United States.

In Europe, for example in a country like Germany, from the time that you want to hire somebody to the time they actually join you, it's more likely to be four or five months, simply because the laws in Germany are very restrictive in terms of an employee's ability to leave their present employer. And then the training and so on pieces would be similar all over the world to what I described in the United States. But the time lag obviously in getting new people in, in certain countries in Europe is much, much greater.

The other color that I would give you is -- and we've talked about this in the past -- in Eastern Europe there's a very deep pool of medically trained people who are not working necessarily in the medical profession. And they're very keen to work as CRA's, for example. So, the good news from our point of view is that a pool of those -- of that type of person with that type of training is a very rich pool for us to fish in, if I use that terminology. Because a medically trained person joining us will require less training and can be effective in the field much faster than, let's say, a microbiology student from a University in western Europe or in the United States. And so in Eastern Europe, our growth has been helped enormously by the fact that we're tapping into highly trained, medically trained personnel. And despite the fact they haven't got clinical research experience, they get up to speed very quickly.

From a very high-level, what would you say the breakdown between experienced and inexperienced hires has been the run rate over recent quarters?

Probably not a lot different than the way it's been for the last 10 years. It's been a feature of our business that we hire, always hire, a proportion of our staff as inexperienced. We think it's a good mix, we think it's good for the culture, it's also good for the cost space. It probably runs about 30 to 35% of our hires would be people who would be classified as inexperienced. But as I said, in places like Eastern Europe, inexperienced doesn't mean lacking in knowledge.

Okay, great. Thanks a lot and congratulations on the quarter.

Jeff Gorman.

Thanks. Jack Gorman here.

Hi, Jeff.

A couple of questions, please. You've answered a number of them but maybe firstly, I suppose a housekeeping. Peter, just the distribution I suppose in profile of the business wins in the quarter?

What do you mean by the distribution, Jack?

I suppose that you've already given us a sense of the way it splits between large Pharma biotech mid size. Maybe if you can give us a sense of geographic distribution but also profile from the point of view of size of wins.

Geographically, nothing particularly startling to report. Strong across all the geographies. Little bit of bias as we've talked about towards Europe and rest of world. We've mention it many times in the past. It's the chase for patients. Eastern Europe is a very strong area and rest of world, obviously Latin America, Asia and so on being increasing in interest for our sponsors. And the fact that we have stronger wins, slightly stronger wins, in those geographies is reflected in the fact we've got slightly stronger growth rates in those geographies than we have in the United States overall.

In terms of size, there are six awards in the quarter in excess of $10 million and then a very broad spread of awards beyond that.

Okay, given the size of your wins every quarter now is there a case for looking for your number of awards, maybe above 20 or $30 million per quarter?

I'm sure you can ask for it, Jack. I'll give it to you.

Jack Gorman. Okay, fair enough. The second question relates to gross margins and I know year on year and they were down a little bit. But just wanted to get a sense of maybe the profile of gross margin as it stands for, let's say, the clinical division versus the lab. Should there be any difference in those? Or indeed, the broader question, has there been any change in either the allocation or the definition of direct costs over the course of the last couple of quarters? Don't really see what you're getting at, Jack, sorry.

Well, I'm just trying to look at the, I suppose, the slight difference between the -- if you look at overall quarterly operating margin [cure] on year on year, it was up from 10.6 to 10.9. But we had a gross margin decline, on my figures, any way. I'm just wondering if there is something to look out within that or is it something that concerns yourselves at all?

No, there's nothing to concern us there. And there's certainly been no change in the way we allocate the costs. So it's nothing more than the normal business mix issues that you have operating in 33 countries across a number of different business units.

Okay. And there would be any difference between what we should expect from the labs division versus the clinical division in that regard, Ciaran?

Well, I mean the labs business is a leverage based business so the gross margin there will depend a lot on mix and throughput and things like that. So, it's going to change from quarter to quarter depending on what you're doing. I'm not really seeing where you're coming from here, Jack.

No, no, I'm just exploring the figures more than anything else on it. Okay. No, if there's nothing that's jumping out at yourselves, then that's fine.

I think traditionally, Ciaran, is we've had a lower gross margin in the lab business than in the clinical business. Isn't that correct. So there is a difference in the lab business, Jack, but that's always been there in terms of the lower gross margin, higher SG&A in the lab business.

And that's a structural thing, Peter, as opposed to moving from losses to profits?

Well, it's a structural thing given the volumes we have currently. What we would hope -- as I think Ciaran was alluding to -- what we would is as the volumes in the lab increase, the SG&A would not increase as rapidly. Therefore, you'd see the gross margin expanding which would in turn translate into an improved margin and operating margin. Ciaran, am I speaking out of turn?

Yes, I don't know if -- the SG&A isn't going to affect the gross margin in the lab. What's driving the gross margin in the lab are things like just the sheer volume going through the lab.

What I'm saying is the SG&A won't expand as the volumes in the lab increase.

No, it won't.

Which should -- which would mean that the gross margin would expand. Let's leave it there. (multiple speakers) This is one we obviously have to work out (multiple speakers).

Maybe I'm barking up a blind alley but no, I just wanted to check that out. That's great. Thanks, guys.

Alex Alvarez.

Hey guys, thanks for taking the questions. I was curious here, as we continue to see really strong growth, [even] will become more difficult comps for you guys. Are you still having to make a lot of investment in your infrastructure? You've got the legal contract management, the finance folks that play a key role as you bid for opportunities or is there some opportunity there to leverage some of the hiring that you've done in the past?

Ciaran, do you want to take that one? Or would I take that?

Why don't you take it.

I'll take it. I suppose the aspiration, Alex, is that we get leverage from the business. And I think one of the questions that Jack Gorman was asking was that if you look at the trends, our SG&A percentage has actually have been dropping. But unfortunately our gross margin has also been dropping so we haven't seen as much improvement in the operating margin as we would have liked to have seen. The truth is or the reality in our business is -- and it's something we're constantly watching and we'd like to see more leverage -- is with this rate of growth, there is a need to continue to add support staff at IT, at HR, at finance and so on. And we're not getting the leverage, as much leverage as we'd like to get because just making sure that we have enough infrastructure to service this rate of growth is our primary focus.

We do hope and we do expect that in time that we'll derive more leverage from that area. But, I've always said this, the amount of operational leverage in a people based business where the revenues are derived by hiring more people is limited. And therefore I wouldn't want to overexcite expectations in terms of the amount of leverage we might drive.

Do you want to add anything to that, Ciaran?

No. That sums it up.

I understand that. That was helpful. And then on the labor front, can you just tell us how many employees came over with the DOCS acquisition?

Just over 350.

Okay. And then more generally sort of on your retention rates or turnover rates, would you sort of care to comment what the trend has been over the last quarter or so?

It's not one we track on a quarter to quarter basis, Alex. The last three years it's been pretty consistently down between 15 and 16% and that trend has not changed in 2007.

Okay and then should we expect to see any meaningful moving expenses I guess in Q3 that we should keep in mind for our modeling purposes?

In relation to move into the new facility?

Right.

No.

Okay. And this is the last one. I apologize if I missed this but given the acquisition of DOCS, is there any change to guidance even at least on the revenue side?

No. We're not going to revise guidance at the moment.

But we should keep in mind the sort of the expectations you gave for the acquisition in the second half of the year?

You should.

That's fair. Okay, thank you.

Ian Hunter.

Good afternoon, gentlemen. I think your new business plans have been broken down every which way but the only one I can see that hasn't been done yet is can you give us an indication of the breakdown in terms of disease indication? There you are now. And then if you'd give us an idea has there been any change in what the hot areas have been in the last few years? I mean there's oncology is out there, et cetera. I'm just wondering if Alzheimer's is starting to track up a bit, et cetera. And then on a broader scale, just an idea which indications you feel you've got the expertise in and are there any where you think you should be looking to scale up your presence?

Well, Ian, first of all, talk about hot areas. As you would only know too well, Ireland certainly is the hot are this summer. Talking about business wins and backlog, the hot area continues to be oncology but the diabetes area, endrochronology, particularly focused on diabetes and obesity is also very strong.

In terms of year to date in 2007, the greatest contributor to revenues is actually the endrochronology area which contributed 20.5%; 20.5% of our revenues so far this year. Oncology was the second largest at 14.5%. However, when I look at our backlog, oncology represents over 20% of the backlog and endrochronology represents high teens in the backlog.

So at the moment, the run rate I suppose on our backlog from endrochronology is stronger but overall more of our backlog is represented by oncology. Those would be the two big areas. And then you've got a pretty broad spread in CNS, anti-infectives, gastroenterology and so on thereafter.

And would you characterize now ICON as being in a position to basically run trials in any type of indication?

Yes.

And that's been a strategic goal of ours from very early stages and obviously of the scale that we're at now I think we can credibly do that.

(OPERATOR INSTRUCTIONS) [Sam Farthing].

Hi there. Good results, guys. Well, then, most of my questions have been answered. Just a couple of things. For the Central lab, given the underperformance I guess over the last few quarters, have you changed at all your expectations in long-term in terms of margins for the lab?

We haven't, Sam, no. We still expect that if we can achieve greater volumes for the lab, and we believe we can, that margins in the lab can reach 15% and perhaps exceed 15% in due course. But our goal has always been to get the margins in the lab to 15%. We believe that is achievable provided we can get the business wins required to support that.

Are you sort of changing your timeframe in terms of you're saying sort of in 2008 for that? In the past are you looking at a longer timeframe to reach those sort of levels now?

We've talked about, I think, some time ago we modified expectations slightly and said that by the end of 2008 we hope to exit 2008 in the lab with margins between 12 and 14%, Ciaran. Isn't that what we have been saying?

So, we don't think we're going to get quite to 15% by the end of 2008. We should get close.

That's 15 that we spoke about is (inaudible) (multiple speakers)

No, that's -- okay. My other question involves staffing expectations for the rest of the year in terms of what have you got forecasted in I guess for additional organic growth in staff?

Organic growth in staff will really be driven by organic growth in revenue. So we haven't changed our -- as Ciaran has said -- we haven't changed our guidance, so we would still expect staff numbers to grow in line with how we expect our revenues to grow.

Orla Hartford.

(inaudible) actually if I could talk specifically about the Central lab targets for this year. Are you still comfortable that revenues in the lab will be above 15 million at the end of the year and the margins will be 8 to 10%?

At this point I think you'd have to say that given that we've posted relatively flat revenues for four quarters in the lab and around the 13 million mark, getting to 15 in two quarters will be a stretch. I'm not saying it won't happen but certainly if you look when we first made our forecast, we'd been coming off the back of four or five quarters when the lab constantly posted revenue increases of between 1 and 2 million per quarter. Hence, when we got to the 13 million revenue level a couple of quarters ago it was reasonable to assume that that would drive on to 15 given the backlog and the level of business wins. Sitting here in July, 13 million and talking about 15 in five months? No, it's not as clear as it would have looked a few quarters ago. If we don't push towards those volumes obviously the margin given the leverage in the lab won't be as high as it would have been forecast.

But I would expect, I mean we've seen the lab margins go from 6% to 6.6% between Q1 and Q2. I would expect it to exit the year originally -- the 8 to 10% forecast again was before we were quoting with the stock compensation charge for the SFAS. So, the equivalent range now is the comparable apples to apples range is 7 to 9. We're pushing 7 this quarter at 6.6. So I'd expect that the margins will certainly be in the 7 to 9 range. The revenues may not be at 15 by the end of the year. And the higher those revenues are, the closer to that 9% I'd expect to be.

Okay, very good. And just on the cancellations in the quarter. Is there any common parameters there in terms of client type, maybe (inaudible) class, study delays, anything just generally that had the cancellations actually been split out?

Not really. And obviously they're pretty modest. It's a pretty modest cancellation rate as well. So there's no trend or there's nothing really to draw out of it that would be meaningful.

Okay, very good.

Dave Windley.

Thanks for taking the follow-up. On the guidance, I understand you're not raising guidance. Just wanted to clarify relative to the 16 to $17 million revenue addition from the DOCS acquisition from the back half. I guess I just want to hear you say it out loud that you're basically being conservative and we shouldn't interpret this as a reduction in the overall, say, core business or non-DOCS business lines in terms of your expectations overall. I understand Central lab may be a little lower but clearly clinical is running hotter and you're beating estimates and your backlog coverage is 77%. And that all looks very, very good but you're not raising guidance.

Well, let me clarify that, David. The guidance we gave, we gave a range on revenue, we gave a range on earnings per share. And we're not changing the earnings per share guidance. We've said the DOCS we expected to be earnings neutral in 2007 and we do expect it will be mildly accretive in 2008. So for 2007, it doesn't have any impact on our earnings per share guidance.

Clearly we've bought something that adds revenues. So you guys are the analysts and if the guidance we gave was [560] to [580] in relation to the business before DOCS and we've given you a very clear guidance as to what we expect the revenues of DOCS to be in the second half of the year. So you may choose to change your revenue forecast in that regard. If we start changing guidance around, it gets messy. So we've given you all the guidance I think you need in order to adjust your models.

Okay. All right, that's fine. That answers that question. I appreciate that. Thank you.

And maybe -- well, I'll add one thing to that. Obviously with the performance of the second quarter, our current expectations would be that we'll be closer to the top end of that guidance than to the bottom end.

(OPERATOR INSTRUCTIONS) It appears we have no more questions in queue. I would like to turn the call over for closing remarks.

Thank you. We are delighted with ICON's momentum this year and we look forward with confidence to the remainder of 2007. Before I conclude, finally, I would like to welcome the staff of DOCS International into ICON group. We're excited by the opportunity this acquisition will bring. As part of an enlarged ICON Contacting Solution division, it will offer our clients greater flexibility when running clinical projects in (inaudible) and give them access to global pools of talents through one vendor.

Ladies and gentlemen, thank you again.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect and have a good day.